Motor Takaful:A promising Oasis

or a Treacherous Mirage?

A Malaysian Case Study with special focus on Claims

Management

KHAERUDDIN SUDHARMIN MBA (Hull), LS7037 (Malaysia), Fellow PWI (UK)

Managing Director & CEO MOTORDATA RESEARCH CONSORTIUM Malaysia

in partnership with THATCHAM UK

Prologue slides 2-6

Claims Management overview slides 7-21

MRC case study slides 22-34

Epilogue slides 35-37

Agenda

Takaful insurance principles:a protection plan based on Syariah (Islamic laws) principles where a sum of money is contributed to a common takaful fund in the form of participative contribution (tabarru’). A contract (aqad) is undertaken to become one of the contributors by agreeing to mutually help each contributor, should any of the contributors suffer a defined loss.

What is Motor Takaful?

One unique feature of a takaful plan is the sharing of surplus of the fund between contributors and the takaful operator based on a pre-agreed ratio

The surplus is arrived at after deducting expenses such as claims, re-takaful, technical reserves, and management expenses

Contributors will be entitled to this surplus if they have made no claim during the period of takaful

What is Motor Takaful?

Some Statistics…

Year Conventional Motor

Motor Takaful

2006 3818.40

261.90

2007 3865.50

337.20

2008 4253.50

391.80

Some Statistics…

Growth Rate

Conventional Motor

MotorTakaful

2006-2007 1.2

%28.7 %

2007-2008 10 % 16.2

%

2 goals of claims management…

1.reducing the cost of claims 2.treating customers fairlyboth goals can be achieved simultaneously by reducing the claims life cycle.

many changes to the way in which claims are…

• Handled; Viewed;Managed• Are claims evolving? • changes are incremental and accumulative, rather than sudden and dramatic…

old claims environment

Considered as a back-room function only five or ten years ago with little importance to the industry

Transformation…

from an administrative function to a

key business driver

Generally…

agreed that claims is much closer to the heart of the industry than ever before and in many cases claims is believed to be the biggest trigger to an organisation’s profit and loss

So…

it is not surprising that in this ever-competitive industry, claims has a greater presence

Therefore…it would be unfair to say that claims

has changed whilst the rest of the insurance and takaful industry has stood still. Claims has evolved to

reflect the dynamic nature of today’s industry but claims has

experienced some of the greatest changes within insurance and

takaful in recent years…

contributing factorsin the evolution of claims

utilisation of new and better technology

better business processes

offshoring

major concerns…

having the right claims professionals is vital

attracting, recruiting and retaining the right claims staff is one of today’s most pressing issues and reinforces the need for the continuous development of professional standards in claims practice. (talent management)

Positive changes…

better technologybetter understanding of claimant satisfaction/loyalty

understanding of financial influence and

the reduction in costs

Definition of a loss adjuster…

Someone who gives a claimant half of what he claims,

leaving him feeling he has received

twice as much as he deserves…

A promising oasis….First and foremost, a company should place the highest priority on conducting all facets of its business in an ethical manner, including claims management

Just a few people acting unethically can have a negative impact on the performance of a business

Or a treacherous mirage?...Most claims professionals agree that claims is in a perpetual state of change and it is inevitable that more is on the horizon…

Or a treacherous mirage?...Claims management is an area that can and has attracted abuse in the past (NY Fraud investigations) so its appropriate that we are mindful that claims management can have a dysfunctional consequence…

THE PERFECT STORM

A Malaysian Case StudyHelming through the barriers of technologySkippered by‘Captain K. Sudharmin’

MRC Centralised Database was

established to minimise subjectivity in motor repairs estimation

The Mandate…

Implement and localise a single and standard database of replacement motor parts nomenclature, price reference and repair times – based on the internationally recognised Thatcham Standards adopted in the United Kingdom – to prepare computerised estimates;

Establish a shared communications hub or claims processing centre (CPC) through which all estimates would be routed so that a reliable statistical database and information bank is available for the industry and regulatory bodies; and

Certify and conduct compliancy audits on all front-end estimating systems developed or marketed by software houses that are linked to the MRC database and CPC.

The VesselMotordata Research Consortium (MRC) Malaysia Subsidiary company of a homegrown

IT powerhouse awarded a 10-year concession by the

motor insurance industry to provide a Centralised Database of Spare Parts Prices & Repair Times for Electronic Motor Claims Settlements

Partnered with a software company & a renowned loss adjusting firm

Business Model was mirrored after the world class UK Motor Repair Research Centre (THATCHAM)

The AssignmentProvide A Single, Standard Spare Parts and Repair Times Database & Electronic Linkage

Responsible to electronically link the various parties;38 Insurers

12 Takaful operators40 Loss Adjustors1500 Repairers (Workshops)

Responsible in facilitating the motor claims settlement processes

To provide the industry standards in electronic claims estimation, thus reducing subjectivities

Provide key statistics & transparency from the recorded motor claims transactions between these parties

The ChallengeIntroducing e-technology to the automotive repair industry Computerized 190,000 motor claims

cases per year from the traditional manual method

Contain the escalating claim cost paid out by the insurers (RM1.4 billion a year)

Provide comprehensive updates of spare parts & repair times database to insurers, loss adjustors and repairers (end users)

Educate all end users to process estimates/claims electronically

Record all motor claims transactions and subsequently reduce malpractice and fraudulent claims

The Storm RecipeInsurers, Loss Adjustors, Repairers, e-technology

Insurers in dire to reduce the claim cost which increases by 11% annually

Loss adjustors to maintain the long contract relationship with insurers

Repairers must retain the escalating profit margin Changing the operational mindset of the 30 year

old motor repair industryThe use of database and system will result in the

following; Claims will be itemised and transparent to all Claims billings will be negotiated in great depth &

detail Claims processing cost will be significantly reduce All claims data transactions will be compiled and

reported to relevant regulatory bodies

The Wind Picks UpRepairers cry foul

•The electronic database of spare parts prices dictates the claims cost and the margin of negotiation between parties was reduced and contained•Repairers were branded for malpractices and blamed insurers and loss adjusters for slashing the claims cost arbitrarily•Most repairers struggle to use the system due to lack of IT knowledge•Repairers, loss adjustors, & insurers had to change their traditional negotiation method using software & database overnight•Repairers organisation was not recognized by any regulatory party, thus MRC was branded as an insurers scheme to control repairers’ livelihood•Complaints were lodged right up to the minister

The SwellLoss Adjustors felt the pinch

The MRC integrated seamless system and database, provide super fast settlement service in comparison to loss adjusters’ manual assessment practice

The cost of assessing the claims through technology were reduced by a stomping 70%

Threatened by the sudden implementation of e-technology, loss adjusting firms scrambled in securing the business contracts with insurers

Loss adjustors who were out to justify their services for insurers, suppressed the repairers estimates further

MRC was starting to become the punching bag

The Eye of the Storm

When using MRC database & systems, study showed that most of the claims managers and executives never repaired cars before (which is understandable)

Only a handful of insurers & takaful acknowledged MRCs’ benefits then

Pressured by their top management to reduce claim costs, claims executives had tough time justifying approvals electronically

Now that there’s transparency, past settlement processes were critically looked into by auditors and/or regulatory body

The Big HitMRC was questioned

The MRC Database was directed to include cheaper spare parts prices apart from genuine parts prices only

The Database was considered inaccurate and not comprehensive enough

MRC was considered not an independent entity and makes too much profit

The claims data (transacted) were to be considered industry’s confidential information instead

Investment on hardware and software was not justified

Regulatory body was questioned for supporting MRC system whole heartedly

S.O.SMRC captures less than 100 claims a month only

MRC was in the 3rd year of operation with over RM6 million spent on network infrastructure alone

Quietly new proposals were submitted by other parties to replace MRC

Old claims approval practices were still favorable

MRC Spare Parts Pricing Database was target locked by the Spare Parts Industry (Total spare parts traded in year 2002 – estimated @RM 400 million)

Regulatory body steps in and questioned insurers & takaful operator’s reluctance in using MRC system

Beneficial Outcomes

Improved turnaround time for motor claim settlements

Itemised BillingTechnology and StandardsNew Guidelines for Motor Claims

SettlementsParts Cost ReductionPromotion of Genuine PartsMRC as Industry’s Platform

Bonus…

Our data and analysis has broken down the wall between users

and suppliers eg use of parts data provided to manufacturers who in turn review

and reduce the cost of their parts which directly lower cost of insurers

Conclusion?

Motor Takaful (specifically claims

management) is both a promising oasis and a treacherous mirage…

Takeaway…

Claims Management a major component in conventional insurance and takaful, is strategic

Dispel the perception that takaful is religio-centric; takaful is for everyone

MRC is an example of Government-Industry collaboration

MRC is replicable in other markets

Thank you…